Love him or loathe him, no one can doubt that Tesla CEO Elon Musk has a penchant for self-publicity and a talent for disruption in industries from automobiles to space. He has lately taken an interest in the metals and mining sector. In June, he tweeted that he would provide a “giant contract for a long period of time if you mine nickel efficiently and in an environmentally sensitive way”.
- Renewables technologies and electric vehicles require metals often sourced in countries with spotty mining safety records
- Investors are increasing their scrutiny of mining sector safety and supply chains
- Blockchain should play a role in supply chain verification with potential for differentiated metals pricing
In February, he again took to Twitter, writing: “Nickel is our biggest concern for scaling lithium-ion cell production.” Generously, this might be called enlightened self-interest. But the truth is, Tesla is unwilling to provide any information about its supply chains. It is not alone in its seeming indifference to the source of the raw materials for its supposedly ‘green’ cars.
In December 2019, the Washington DC-based law firm, International Rights Advocates, filed a suit in the US District Court against Tesla, Apple, Microsoft, Dell and Alphabet, claiming damages on the behalf of the parents of 14 child labourers as young as seven working in mines in the Democratic Republic of Congo (DRC), the source of 60% of the world’s cobalt, itself a crucial component of lithium-ion batteries.
Six of the children were killed in tunnel collapses and others suffered life-changing injuries, including paralysis. Terence Collingsworth, the lawyer for the plaintiffs, says: “The rush to declare electric vehicles (EVs) and other forms of clean energy as the solution to climate change and sustainability is premature against the background of the hard facts about how mining currently operates. It is a brutal and primitive industry.” The DRC is also a significant copper producer.
For investors, this presents a dilemma. Adam Matthews, chief responsible investment officer of the €3bn Church of England Pension Board (CEPB), points out that Tesla is now assessed using the Transition Pathway Initiative.
This is an asset owner-led programme designed to gauge the preparedness of a company for the transition to a low-carbon economy.
With regard to Tesla, Matthews says the firm “comes out top in terms of fleet efficiency, but in terms of management it comes bottom, because of lack of disclosure”.
Rory Sullivan, CEO and founder of Chronos Sustainability sums it up: “It is not a company that is willing to respond to questions it does not want to answer.” Indeed, over a period of almost a month IPE sent three requests to Tesla’s European press office to ask if it could reveal anything about the sources of its copper, nickel, cobalt and other raw materials. No replies were forthcoming, not even the standard “no comment”.
A change is imminent
Tesla’s stance is increasingly at odds with the demands of investors and regulators. Understanding supply chains is fast rising up the agenda and nowhere is that more pressing than in metals and mining.
In March 2021, the European Parliament backed an ambitious proposal to promote “corporate due diligence and corporate accountability” by focusing on mandatory human rights, environmental and governance due diligence throughout a company’s supply chain – human rights due diligence (HRDD).
Making HRDD a legal duty is intended to force companies understand their supply chains and, in turn, put pressure on suppliers to act in more responsible and sustainable ways.
Investors would certainly welcome this. In a survey conducted at its (virtual) ESG conference last December, BofA Global Research asked participants to rank their biggest focus for 2021. Three of the top four responses are all intimately bound up with the metals that will play a central role in a decarbonised, net-zero future: climate change; green energy/renewables and supply chain issues (see figure).
The second most important issue noted by investors is corporate governance. To say miners have a spotty track record in this regard would be unnecessarily delicate, as evidenced by Rio Tinto’s destruction last year of a priceless indigenous sacred site – a decision that led to the departure of senior executives and eventually the chairman.
“The rush to declare EVs and other forms of clean energy as the solution to climate change and sustainability is premature against the background of the hard facts about how mining currently operates. It is a brutal and primitive industry”
The tale of tailings
Rio Tinto is not alone in abjectly falling short on many ESG criteria. In November 2015, at Vale’s Germano iron ore mine near Mariana in the Minas Gerais state of Brazil the tailings dam, a liquid embankment dam designed to store the toxic by-products of ore processing, failed. The tailings contained arsenic, lead and mercury and spread pollutants along 668km of watercourses, causing water shortages and displacing thousands.
In January 2019, the firm suffered an even more catastrophic tailings dam failure in Brumadinho, in which 270 people died.
On one day, Vale’s stock price dropped by 24%, the equivalent of $19bn. “I was in Brazil when Mariana happened,” says John Howchin, secretary-general of the Council of Ethics for the Swedish National Pensions Funds. “I was angry.”
But Brumadinho was the final straw. “I think it really shook investors. This wasn’t just to do with the failings at Vale, but a general sense that the mining industry was incapable of properly regulating itself,” says Howchin.
The response of Howchin and Matthews at CEPB was to establish The Mining and Tailings Safety Initiative. Backed by 100 other investors with a total of $12.5trn of assets under management, its first goal was to seek dam-by-dam disclosure from 655 publicly listed extractive companies.
In total, 202 companies responded, including 50% of the industry by market capitalisation and 20 of the 22 publicly listed members of the International Council of Mining & Metals.
The CEPB and Swedish National Pension Funds (SNPFs) joined forces in December 2020 with the UN Environment Programme and Principles for Responsible Investment to create an independent, self-sustaining, international institute to support the implementation of the Global Industry Standard on Tailings Management.
“We are acutely aware more needs to be done,” says CEPB’s Matthews. “Tailings dams are a good place to start because of the environmental threat that they pose. But in the energy transition, we need to understand supply chains and all the ESG issues related to them. That’s why we have signalled there is a need for a 2030 vision for the mining sector that looks at issues that cut across the sector.”
The disinfectant of transparency
Greater supply chain disclosure seems to be one clear direction of travel. LME Group, the world’s largest physical metals trading venue has been taking a similarly incremental approach to the tailings dam initiative. “There was an inflection point in around 2017,” recalls LME’s chief sustainability officer, Georgina Hallett. “There were a lot of concerns among the risk and compliance teams at big member firms around commonly mined conflict minerals tin, tungsten, tantalum and gold.”
Once again the conflict-riven DRC was the flashpoint. The message from banks was a blunt one. “They said they were getting to the point where they would not allow their traders to trade certain markets unless it could be proven that the metals in storage at LME warehouses were responsibly sourced,” says Hallett.
From 2022, all metals in LME warehouses will include not just metallurgical characteristics, but also details on sourcing. Hallett admits that human rights and conflict metals are a baseline expectation. In other areas of ESG, customer choice comes into play.
The LME is creating a centralised data repository where metals producers can list their sustainability credentials. This enables those looking to procure sustainably produced metal to find it without needing to trawl through company accounts and published SRI reports.
The idea is that the end user of metals can then apply additional criteria beyond the baseline of human rights and conflict. The LME is also creating a new spot-trading platform to support clients who want to differentiate between how metals are sourced, mined and processed.
The mining industry itself has taken steps to burnish its ESG credentials by introducing certification schemes, including the Copper Mark and Fair Cobalt Alliance.
However, few would claim that mining is rapidly becoming a paragon of ESG. As some commodities grow ever more scarce, miners are having to look deeper into the ground and further afield for metals like copper.
One of the final processes of obtaining copper from sulphide ores is water flotation. Ironically, new copper finds such as the Escondida mine (in Atacama, Chile) and Oyu Tolgoi (in the Mongolian Gobi desert) are located in some of the driest parts of the planet.
Freeport-McMoRan’s Grasberg mine in Indonesia used to dig copper straight from the ground, providing over 6% of world supply but for new sources of copper it has to go deep underground where the only way to extract copper is by hydraulic fracking.
Sullivan at Chronos Responsibility has worked for oil, gas and mining companies. He says: “Mining can never be a fully ‘green’ industry. It is not just environmental issues that are involved. One of the big considerations is how to treat indigenous peoples, as there will inevitably be competition for resources, especially water.”
In Indonesia, Grasberg was largely tolerated by both locals and the government, but there has been a growing anger about seismic activity caused by fracking.
Decarbonisation needs a lot of copper. Every megawatt (MW) of electricity produced by large offshore wind turbines requires 15 tonnes of copper, conventional power just one tonne per MW. EVs require on average 83kg of copper but internal combustion engines need less than 20kg, according to Jefferies Equity Research.
More than 70% of the production of class 1 nickel, the type needed for lithium-ion batteries, requires ores to be smelted at high temperatures, which results in the emissions of sulphur dioxide (SO2) gases, the precursor of acid rain and a contributor to global warming. The smelted product is then further processed, involving leaching with sulphuric or hydrochloric acid, which can release arsenic, fluorine and chlorine.
Anton Berlin, senior vice-president of sales at Nornickel, the parent company of Norilsk Nickel, says: “Mining is invasive by nature, so there is nothing you can do to have zero impacts. But you can cut emissions. For example, we use hydro power. But we are operating in temperatures of -50°C, so EVs are difficult.”
There is also some intellectual dissonance among environmentalists. The easiest way to deal with the controversial issue of tailings is to sink them to more than 600 metres depth in the ocean: “At that point they are chemically inert. That is the science, but no one would even dare to suggest it,” says Berlin. “Dry tailings create their own pollution issues. We use tailings dams and but build them in structurally and environmentally sound ways.”
Tailings standards, ISO, certification bodies and the multiplicity of non-standardised ESG criteria make it difficult for miners to choose how best to demonstrate their commitment to responsibly sourcing metals.
Just keeping on top of all various ESG initiatives is a significant cost. The CEPB’s Matthews has a modicum of sympathy. “I hear and I understand some of the concerns of the industry about ever-increasing disclosure requirements. But sustainability is an agenda, not an end goal. Some companies take the attitude that we have reached the best-practice bar. But when you take your eye off the ball is when things go wrong.”
Still, there are few incentives for miners to go the extra mile. “I have always found it very difficult to assess whether good ESG scores for miners are then translated into higher share prices,” says Chronos’s Sullivan.
“The biggest driver is still the product mix, based on how investors view the price outlook for those commodities. Perhaps there should be a premium for good ESG and a lower cost of capital for those miners. But currently it’s all a bit will-o’-the-wisp.”
Matthews insists that there should be both a sustainability premium built into share prices and those miners who do not aspire to best practice or seem indifferent to ESG should be punished with a higher cost of capital. “The banking, insurance and asset management industries should all be aligned. No one should get a free pass.”
That does not seem to be the case currently. Hamad Ebrahim, head of research at NTree, a fund distributor that has set up an exchange-traded commodities (ETC) platform with Norilsk Nickel and launched a physically-backed palladium fund earlier in this year, believes investors are still primarily driven by performance. “I think differentiated prices are the definitely the direction of travel, but we are not quite there yet.”
The beginnings of a shift to differentiated prices could amount to a revolution in metals markets. Instead of one price for copper, nickel and aluminium, there could be multiple prices (and contracts) based on ESG criteria. Ultimately, Adam Smith’s invisible hand will guide miners toward better ESG, but only if manufacturers are willing to pay more and are confident that end-consumers will bear the additional cost of a greener EV or tablet.
For Sullivan at Chronos, single or dedicated mine sourcing, the various forms certification and data gathering, such as that being undertaken by the LME, is one way forward. But he accepts that that may only be financially viable for precious metals.
“The next steps will be waste, water usage and recycling and we aim to have all of these aspects of the value chain independently verified by a third party by the end of the year”
For example, the Royal Mint Physical Gold ETC was recently able to confirm compliance with the LBMA’s enhanced good-delivery guidance. However, about 2,500 tonnes of gold are mined annually. The nickel market is 10 times larger and more the 22m tonnes of copper are mined each year.
A compelling case for blockchain
Piecing together disparate data from multiple sources for bulk commodities presents a formidable challenge for producers and end-users. Blockchain, or distributed ledger technology (DLT), offers a practicable solution. It is infinitely scalable, secure and immutable (changing one block would mean changing them all) and far more efficient than maintaining multiple Excel spreadsheets or SQL databases.
Among miners, Nornickel is in the vanguard. It features among the Forbes Blockchain 50 companies with revenues greater than $1bn (€850m) that are at the forefront of employing DLT. In 2019 it joined Hyperledger an open source initiative to advance the use of Blockchain hosted by Linux. Hyperledger and the Hyperlink Fabric Blockchain also underlies Atomyze, a US-based tokenisation platform. Nornickel has created two types of token.
One is an industrial token. It is a digital contract which specifies the metal grade, the date and point of delivery for physical metal that has yet to be produced and shipped. The second token is designed for investors and represents a claim based on current prices for metal that has been produced and is in storage.
But for Nornickel’s Berlin this is just the beginning of the use case for Blockchain and tokenisation. In January, it joined the Responsible Sourcing Blockchain Network, set up by IBM, Ford Motor Company and LG Chem. Nornickel’s supply chains will be audited annually using key responsible sourcing requirements. These audits will cover Nornickel’s Russian mines and refining facilities in Russia and Finland.
Berlin is keen to add further ESG criteria. “Provenance to the mine level and ESG metrics are integral to progress on supply chains. We want to include the carbon footprint from mining to transportation to processing. The next steps will be waste, water usage and recycling and we aim to have all of these aspects of the value chain independently verified by a third party by the end of the year.”
Nornickel is hopeful it can steal a march on other miners as metals markets evolve and supply chains come into sharper focus for both manufacturers and consumers. Howchin at the Council of Ethics in Sweden, says this future could be closer than many assume. He says when they buy an EV, consumers will increasingly want to be convinced that all the metals that built that car are responsibly and sustainably sourced.
“The manufacturer and consumer undermine the good of building and buying a zero-carbon footprint car if the supply chain is not taking ESG seriously,” says Howchin. “I think some consumers will definitely pay a premium for reassurance on supply chains. It’s a win-win: the miner gets paid more for the metal, the manufacturer more for the car. The transition decade is so important and no one will find it acceptable to buy a car with metals mined by child labour. That has no part to play in the future of mining.”